1/03/2011

Why Warren Buffett was wrong about his secretary paying a lower tax rate than he pays

"The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”

It is true that there is a 15 percent capital gains and dividend tax and that is lower than the marginal income tax rate paid by a lot of workers. Of course, this ignores that because of deductions the average tax rate is much lower than the marginal rate. But much more importantly Buffett's claim ignores why the capital gains and dividend tax rates are set at the level that they are set: corporate income has already been taxed once when the company earned it. In the US the combined federal and state corporate tax rate is 40 percent. So let's take a simple example. A company earns $1 and pays 40 cents in taxes. If the remaining 60 cents is paid as a dividend, the 15 percent tax rate leaves the stockholder with 51 cents, for a combined tax rate of 49 percent. The rate would be higher if there is a state income tax. It is highly doubtful that Buffett's secretary in Nebraska pays an effective 49 percent marginal income tax rate.

Something to remember when Obama talks about taxing millionaires and billionaires.